ETFs For KLSE?

There are discussions underway, apparently, as to whether to launch ETFs on KLSE. Now, is that a good move? ETFs has taken off in a very big way on Nasdaq. ETFs or Exchange Traded Funds are basically a basket of stocks. Say I were to start a Palm Oil ETF and cap it at RM500m, basically I would select stocks from a number of palm oil companies, say IOI Corp, KL Kepong, Guthrie, PPB Oil Palm and Kulim. The way each fund is structured would be up to the issuer. I could prorate according to market cap or just by equal percentage of funds or something in between. I would not use market cap as the ETF would then be an IOI Corp tracker. But if I were to use 30% IOI Corp and the rest divided among the other 4 it might make more sense. Then basically I would issue 500m shares at RM1 to sell or place out to funds and the public. Would such kind of funds find a market in KLSE?

ETFs work for Nasdaq cause there is sufficient market participation and demand for unique product for diversification. It also allow Nasdaq investors to buy stock or exposures into areas where it might be difficult to invest direct. Just to name some possible examples: Alternative Energy Power Europe ETF; South American Large Cap Banks ETF; etc... In USA the number of available stocks and sectors are enormous, and ETFs can aggregate them into nice parcels for direct exposure.

ETF can be used only if it enhances investing in Malaysia. One of the big worry among international funds about investing in Malaysia is size. ETFs can get around that. Say Palm Oil ETF, just make it a decent size, say RM2bn. But with such a size, you would have to include a lot of companies, maybe even palm oil related companies listed in Singapore and Indonesia. The impact is there would be a shrinking of free float in those companies, but you get a highly regarded, liquid representation which funds can move in and out. Malaysia cannot do many ETFs with those guidelines, maybe an Oil & Gas ETF but not much more. If its a small ETF (anything less than RM250m), it will not be attractive for funds and I doubt very much whether the public would be interested. If there is scant intrest, the share price would trade below NAV, which would further dim interest in the instrument, and would die a natural death very quickly.

The available sectors ready made for ETFs in Malaysia are not sufficient to contemplate the idea. It would make sense for Nasdaq to keep listing these type of unique ETFs on Nasdaq where the interest and depth of markets are better. If more such ETFs are available in USA or London, it would help those who would not have direct investments into KLSE to buy Malaysian type companies and/or exposure at the appropriate time. ETFs in the end are just tracker stocks. If London and Nasdaq were to issue ETFs on Palm Oil with a cap of US$300-500m, a lot of free float would be soaked up from the Malaysian stocks, and you don't really need permission from KLSE to do that.

In conclusion, ETFs on KLSE will fail miserably. Do not get caught doing it just because it was successful elsewhere. Its size. You can get the big enough ETFs without negative repercussions, then go do it. If its small ETFs (RM100-200m), then forget it.

If Yus-baby is thinking of ETFs with a regional theme, say Asian Airlines ETF or Asian Power ETF, and is confident of issuing RM1bn size funds, then its worth considering, and do it fast cause SGX will be a better place to do these things but have been dragging their feet. SGX issued an ETF on their index and another on bonds and did not get much activity, size is a concern. Live and learn.